Protecting your firm from litigious clients

Ron Parisi, executive vice president for risk management at Camico has written a very thought-provoking article, here, in accountingTODAY, the US website for accountants. You’ll have to register to get access to the full article. Camico is the largest CPA-directed program of professional and employment practices liability insurance for the accounting profession in the USA.

Mr Parisi says: “Although we live in a litigious age, it’s never a good feeling waiting for a summons and complaint from a disgruntled client to be delivered to your door. And as the severity of claims against accountants has been on the rise, limits on professional liability policies have remained level, the limits on E&O [professional liability] policies have been stagnant over the last five to 10 years, while the verdicts are getting higher”. He urges accountants to be mindful of the limits of liability on their insurance as verdicts and losses are tending higher.

Parisi cited the recent lawsuit brought by noted author Patricia Cornwell against Top 100 Firm Anchin, Block & Anchin, which resulted in an award of $50 million. “A lot comes down to documentation, both between the client and the CPA, and internally within the CPA firm,” he said. “When there’s a lack of documentation, it creates a vacuum that juries tend to fill in negatively.”

Make sure you do a good job…

“You can discuss risk management as much as you want, but at the end of the day, you’ve got to do a good job; otherwise there will be claims,” said Ralph Picardi of Lapping & Picardi LLP. An attorney and former CPA who specialises in defending malpractice claims against CPAs, Picardi said to think of risk management in chronological order.

“First, it starts when clients come in through the door,” he said. “In the firm’s decision to take on a client, you need to think in terms of risk exposure the client will bring, and is the firm prepared to take that on? If you don’t have the resources or expertise, the chances are you won’t do a good job servicing the client. So create a good system for assessing the risk of doing work for particular clients.”

The second step, according to Picardi, is that when you decide to take on new business, you need to create a good engagement letter or contract for the performance of services. “There’s a whole range of sub-issues as to what constitutes a good engagement letter,” he added.

“Third, once the engagement has begun, you need to properly staff the work, and assign the appropriate number and quality of staff at all levels.”

And fourth, said Picardi, “Once the engagement is underway, you need to maintain effective communication with the client throughout the engagement. This includes things like strong billing practices. You want to bill frequently and discuss things that might be occurring during the engagement that might increase the amount of the fee above the client’s expectations. If the fee will be a lot higher, make sure that clients know early or you will have trouble collecting it down the road.”

How good is your engagement letter?

Rickard Jorgensen, president of Jorgensen & Co., said: “Have an engagement letter that appropriately describes the work you are performing and outlines the client’s expectations, and then stick to it,” he advised. Within the engagement letter itself, you can actually build in certain protections and ways to resolve disputes before they become a full-blown lawsuit,” he said. “Also, engagement letters can include payment mileposts, where upon completion of certain services there is an expectation of payment. This way, payments can be made during the course of the assignment, rather than holding back all invoices until the client gets presented with a huge bill at the end. Moreover, if during the course of the assignment the client fails to pay that part of the incremental bill, you can resolve the problem right away.“

Do you have the right clients?

“It always goes back to client selection,” said Wes Marston, vice president of claims for CPA Mutual Insurance Company of America. “There are certain clients you can do the worst job for and they won’t sue, but there are others that you can do the best job for, and they will sue you.”

Firms should be screening new clients better in order to protect themselves against lawsuits, according to John Raspante, senior vice president of risk management for North American Professional Liability Insurance Agency.

Do you have a risk management process?

When professionals follow their own risk management standards, there is rarely a problem, observed Tom Henell, chief operating officer of NAPLIA. “When they stick to their areas of expertise, sign a completed contract or engagement letters, and use common-sense business practices, there is rarely a problem, and when one does arise, it tends to be minimal. Usually, when one of these areas is stretched, larger issues arise. For example, when accountants take on projects outside their expertise, or if they forego getting a signed contract or engagement letter, that’s when we see issues arise.”

Several factors to consider when evaluating clients are covered by the acronym PACE: profitability, alignment, culture and exposure.

There are a number of specific warning signs that can signify a client exposure that should be evaluated. These warning signs include the following, said Henell:

Clients not paying on time;

Clients not taking your advice;

Clients that consistently cause stress in your office;

Clients that fail to provide paperwork on a timely basis;

Clients that you do not trust;

Clients that do not understand the services you are providing;

Clients that don’t appreciate your expertise;

Clients that challenge the need for documentation;

Clients that are a bad fit for your business model; and,

Clients that test your bottom line.

The above is barely an excerpt from the full article. If you do nothing else today except to read the accountingTODAY article, your time will have been well spent.

Mark Lee’s Tips and Advice on Risk Management

This ebook draws on Mark Lee’s experience in practice and from his time as an expert witness. It contains constructive advice to help accountants to avoid professional negligence claims and also how to avoid situations that could result in being reported to your professional body.

Some who read this ebook will be looking to avoid the recurrence of an issue or problem that has caught them out in the past. Others will simply want to know what they can reasonably do to reduce the prospect of having to waste loads of time and money defending spurious claims.

Risk management requires a balanced approach that allows the practice to continue operating effectively; so there should be no need to introduce loads of burdensome procedures.

Mark’s tips and advice are practical, commercial and easy to apply. He is known for his no-nonsense straight talking independent approach. If you have ever heard Mark speak or have read any of his articles, blog posts or tweets, you will want to read this ebook. You can buy it here.

Engagement Letters

I’ve taken the liberty of highlighting the emphasis placed by several people on the value of having the right engagement letter. The reason for that is twofold: first to say that I absolutely agree on the need for an appropriately worded engagement letter and secondly to remind readers that Bizezia’s Contract Engine system still leads the field for engagement letters for accountants and lawyers. Details of subscription rates and options are available here.

Martin Pollins is a Chartered Accountant with wide experience in corporate finance and business management. He holds a number of directorships and has served on the boards of several companies, including those listed on the London Stock Exchange, AIM and OFEX.

He was a Council member of the Institute of Chartered Accountants in England and Wales from 1988 to 1996.

Martin Pollins ran his own firm based in Sussex and was the first Accountancy firm in the UK to advertise on television and Martin went on to create and launch the CharterGroup Partnership (the UK's first Accountancy network) and then LawGroup UK (one of the largest networks of lawyers in the country).

Martin started work on the Bizezia concept in 1996, developing the broad range of information resources and products over the past 18 years.